Schmid v. Baum's Home of Flowers, Inc.

• Decision Date: 04 April 1931
• Parties: SCHMID v. BAUM'S HOME OF FLOWERS, Inc.
• Court: Tennessee Supreme Court

37 S.W.2d 105

162 Tenn. 439

SCHMID v. BAUM'S HOME OF FLOWERS, Inc.

Supreme Court of Tennessee.

April 4, 1931

Appeal from Chancery Court, Knox County; Robert M. Jones Chancellor.

Suit by Adolph A. Schmid, trustee in bankruptcy, against Baum's Home of Flowers, Incorporated, in which the defendant filed cross-bill interpleading H. T. Kern, receiver, appointed to collect rent from leased property in case of the Cumberland Trust Company v. Morris Bart and Wife, lessors. From the adverse decree, trustee and receiver appeal.

Affirmed.

SWIGGART J.

The appeal of Schmid, trustee, and H. T. Kern, receiver, involves a contest with regard to rent of real estate of a bankrupt accruing after the date of bankruptcy. Baum's Home of Flowers, the tenant, leased a portion of a business house in Knoxville from Morris Bart, in February, 1925, the contract being evidenced by a written lease providing for a term of fifteen years, beginning July 1, 1925, with monthly rent payable on the first day of each month, in advance. At the date of the lease, Bart was the owner of the building subject only to an express vendor's lien for unpaid purchase money. The lease contract was duly placed on record in the office of register of Knox county on February 16, 1925.

The bankruptcy of Morris Bart occurred in November, 1928, during the fourth year of the lease. The tenant, at the beginning of each of the previous years, had executed a series of twelve monthly rent notes, for the accommodation of Bart. A similar series of notes covering the fourth rental year was executed by the tenant in April, 1928, and these notes were promptly discounted by Bart with the East Tennessee National Bank, one of the appellees herein. No reference to the execution of notes for installments of rent appears in the recorded lease.

Each of the rent notes for the year beginning July 1, 1928, recited on its face that it was executed for rent for the particular month, and recited that the note would be void in case of a termination of the lease before its due date.

The original complainant, Adolph A. Schmid, trustee, was made trustee in bankruptcy of Morris Bart on November 28, 1928, and thereafter demanded that Baum's Home of Flowers pay rent to him for the months of December to February, inclusive.

On March 1, 1929, the District Court of the United States, in which the bankruptcy estate was being administered, relinquished all claim to any equity in the real estate of the bankrupt; and on or about said date H. T. Kern was appointed receiver of said property by the chancery court of Knox county in a proceeding styled Cumberland Trust Company et al. v. Morris Bart and Wife, the nature of which litigation is not fully disclosed on the record before us. H. T. Kern, receiver, demanded that the tenant pay rent to him after said date, March 1, 1929.

Inasmuch as the tenant leased from Morris Bart only a portion of a large business house, the lease contract provided that the owner should furnish heat, water, and elevator service. The cost of furnishing these items was paid by the trustee in bankruptcy from the date of the adjudication in bankruptcy until March 1, 1929, and by the receiver from that date until the end of the rental year, a period of four months.

No effort appears to have been made, either by the trustee in bankruptcy or by the receiver, to interfere with the possession of the tenant during the period covered by the unpaid rent notes. The tenant remained in possession under his lease contract until June 29, 1929, one day short of the end of the rental year, on which date title to the property passed to Oscar Handley, the purchaser at a sale ordered by the chancery court in a proceeding instituted for the purpose by the holder of the vendor's lien, hereinabove referred to. Thereafter the tenant remained in possession by agreement with Handley.

The ownership and possession of the notes by the bank arose more than four months before the bankruptcy, supported by valuable consideration passing in part at the time. It is not contended that the execution of the notes or their transfer was tainted by actual fraud or fraudulent intent.

The chancellor held that the East Tennessee National Bank, as the owner and possessor of the seven rent notes falling due after the date of the adjudication in bankruptcy, was entitled to collect them from the tenant, and that neither the trustee in bankruptcy nor H. T. Kern, receiver, had any legal or equitable claim for rent, or services rendered, against the said tenant. From his decree, rendered upon an agreed statement of facts, the trustee in bankruptcy and receiver have appealed to this court.

It is contended for the appellants that the several rent notes owned by the East Tennessee National Bank are rendered nonnegotiable by their recitations, and that therefore the bank holds these notes only as "assignee subject to the existing equities between the maker, Baum's Home of Flowers, Incorporated, appellee, and Adolph A. Schmid, trustee, appellant." Ahrens & Ott Mfg. Co. v. Moore & Sons, 131 Tenn. 191, 174 S.W. 270.

That the notes in question are not negotiable is sustained by Hight v. McCulloch, 150 Tenn. 117, 263 S.W. 794. It does not follow, however, that there is any error in the decree of the chancellor. The tenant was clearly entitled to retain possession of the leased premises as against the lessor's trustee in bankruptcy. He did retain possession, in full enjoyment of the privileges contracted for, and therefore no equities arose as between the tenant and his lessor. The tenant concedes his liability for the rent, and the question for determination is whether this rent is payable by the tenant to the holder of the notes or to the trustee and receiver.

It is, however, contended for the trustee in bankruptcy that the registered lease contract provided that the rent for each month would be due and payable on the first day of the month, and that payment by the tenant for a year in advance would operate to mislead creditors and persons dealing with the lessor, who might acquire an interest in the property during the year, relying upon the statements in the registered lease. It is insisted, therefore, that the trustee in bankruptcy would not be bound by an advance payment under such circumstances, and was entitled to the bankrupt's estate subject only to the terms of the lease as recorded.

Execution and delivery of the rent notes by the tenant did not amount to payment in advance. Columbia Grocery Co. v. Marshall, 131 Tenn. 270, 174 S.W. 1108; First National Bank v. Yowell, 155 Tenn, 430, 294 S.W. 1101, 52 A. L. R. 1411; Tiffany, Landlord and Tenant, vol. 1, p. 1081. The purchaser of the notes became the assignee of the rent included in the notes. By the execution and delivery of the notes, the tenant must be held to have authorized their assignment. Matheny v. Preston Hotel Co., 140 Tenn. 41, 46, 203 S.W. 327.

The issue made by the trustee's appeal is, therefore, whether the creditors of the bankrupt are bound by his assignment of his right to receive the rent for the twelve months covered by the notes, the assignment having been executed for value, in good faith, and without fraudulent intent, more than four months before the institution of the bankruptcy proceedings.

Rent accruing to the lessor of real estate under the terms of his lease is said to be incident to the lessor's reversion. It is not a debt within the classification of choses in action, whether evidenced by promissory notes of the lessee or not. This right to future rents is not personal property, and, upon the death of the lessor, or owner of the reversion, passes to the heirs at law with the reversion. Combs v. Combs, 131 Tenn. 66, 173 S.W. 441, 442. Rent is said to be "one of the ten principal incorporeal hereditaments known to the ancient English law." 50 Corpus Juris, p. 758, citing 2 Blackstone, Comm. 21.

It is, however, universally recognized that rent is severable from the reversion, and that the owner of the reversion may effect this severance by granting or transferring the rent to another. This may be done either by "indorsement of the rent notes before maturity," or, if there be no such notes, by an assignment of the rent, "as, for example, an order in favor of a third person by the landlord on and accepted by the tenant." Combs v. Combs, supra.

Whether such severance of rent from reversion is effective against one thereafter acquiring the reversion without notice, either actual or constructive, was not involved in Combs v. Combs, supra, and was therefore given no consideration. And in a thorough search of authorities elsewhere we have examined many cases sustaining the right of the owner of the reversion to assign future rents, and only one specifically dealing with the effect of such assignment on a subsequent transfer of the reversion without notice. Winnisimmet Trust, Inc., v. Libby, 232 Mass. 491, 122 N.E. 575, to be referred to hereinbelow.

In Henshaw v. Wells, 28 Tenn. (9 Humph.) 568, the tenant, Wells, executed negotiable notes for a year's rent of premises which his landlord had mortgaged prior to the date of the lease. The notes having been promptly negotiated to a holder for value, Wells was required to pay the year's rent to a receiver appointed in a foreclosure suit of the mortgagee, upon plea and proof that the value of the land was insufficient to pay the mortgage debt. The court said: "It is the tenant's folly, and misfortune that he executed negotiable securities for the rent agreed on. He may, thereby, be required to pay the rent for this property, both to the mortgagor and mortgagee." The case is to be distinguished from the case made here by the appeal of the trustee in bankruptcy, in that the mortgagee's claim...